America is in for another twelve months of “anemic, subpar growth,” which he pegged at 1.6 per cent, and a “very high” unemployment rate. This despite a rebounding housing market, a helpful boost from the energy sector (think: shale oil and gas), manufacturing employment looking half-decent and the Federal Reserve continuing to pump money into the economy.

Most of the blame for dragging down what could be a healthy pace of growth, Roubini said, goes to the usual suspects: Washington lawmakers. Their stop-and-go tax hikes and spending cuts will likely be enough to shave 1.4 per cent off GDP growth in 2013, but not enough to address the U.S.’s long-term debt woes.

But financial markets are also to blame for America’s paralysis, Dr. Doom continued. “The bond vigilantes are asleep at the wheel,” he said, hinting at the rock-bottom interest rates at which the U.S. has been able to borrow despite its gargantuan debt and seeming incapacity to do anything about it.

Investors’ concerns over countries like Greece, Spain, Italy and Portugal have forced hard political choices in Europe, he noted. Alas, that blessing in disguise has so far eluded Washington.

]]>http://www.macleans.ca/economy/business/dr-doom-why-bondholders-are-partly-to-blame-for-americas-fiscal-mess/feed/1The U.S. debt ceiling: what just happened and what’s up nexthttp://www.macleans.ca/economy/business/the-u-s-debt-ceiling-what-just-happened-and-whats-up-next/
http://www.macleans.ca/economy/business/the-u-s-debt-ceiling-what-just-happened-and-whats-up-next/#commentsTue, 22 Jan 2013 17:51:30 +0000http://www2.macleans.ca/?p=339944Why the House Republicans' bill is not-so-great news

House Republicans introduced legislation (read the full text here) on Monday that would suspend the debt ceiling until May 19.

The bill is somewhat unusual in that, unlike similar legislation in the past, it does not raise the borrowing limit but waives the cap entirely until the set date in May. As Politico explains, this was fine political maneuvering on the part of Republican lawmakers, who thus avoided agreeing to a “specific dollar amount that could be used against them in campaign ads.”

The draft legislation also contains a provision that would withhold pay for members of Congress unless they pass a budget by April 15 (it is a feat that has eluded the U.S. Senate in the past). The GOP is branding this as a “no budget, no pay” measure, although, in fact, it simply delays paying members of Congress until the end of 2014 at the latest.

The prospect of a likely deal on the borrowing cap spurred a series of bullish bets in financial markets, and U.S. observers around the world are drawing a big sigh of relief.

Rewind: a bit of background on the debt ceiling

What the House Republicans’ bill will likely avoid isn’t so much a full-blown default but a technical default. As Keith Hennessey, who was White House National Economic Council Director under former President George W. Bush, argued last week, a scenario in which the U.S. government would fail to pay bond-holders on time (which would without question trigger a credit rating downgrade and increase America’s borrowing costs, not to mention cause utter panic in financial markets) was never really in the cards.

Rather than threaten the creditworthiness of Treasuries, the government would have likely opted to hold off paying some of its other obligations, such as Social Security transfers, veterans’ benefits, military salaries and all kinds of government contractors. Such a move would still likely cause a credit downgrade—the U.S., after all, would still be failing to pay its bills—but it wouldn’t quite spook investors to the degree a missed or delayed payment on U.S. government bonds would.

In general, though, the costs of defaulting on any of the federal government’s obligations, or coming dangerously close to doing so, are very high. So why does the U.S. have a debt ceiling at all?

In the words of the Congressional Research Service, the debt limit “imposes a form of fiscal accountability that compels Congress and the President to take visible action to allow further federal borrowing.” In other words, it periodically focuses voters’ attention on debt and deficit, supposedly making government more cautious about spending spending levels.

Hennessey, for one, recently argued that the borrowing limit can be a useful tool of political negotiation when “rightly understood,” as Tocqueville would have put it. Rather than pledge not to raise the ceiling—which is a threat so grave it isn’t believable, and also makes Republicans look irresponsible—fiscal conservatives should use short-term raises as bargaining chips to negotiate gradual spending cuts. (Whether or not the GOP heeded Hennessey’s advice or reached the same conclusion by itself, the current debt-ceiling bill seems to be doing just that.)

The vast majority of economists, though, would argue the U.S. should get rid of the debt ceiling once and for all. The measure is a holdover from the interwar period, when Congress, stopped vetting every single spending request by the Treasury and switched to the more practical approach of imposing a generic borrowing limit. But what seemed pragmatic then looks redundant today: Congress already controls the strings of the federal purse through the modern budget process, established in 1974. As it stands, the debt ceiling requires U.S. legislators to debate whether or not to allow enough borrowing to cover financial obligations that it has already approved. At the very least, a number of budget experts argue, decisions on the debt limit should be tied to decisions on revenue and spending.

Besides, the debt ceiling doesn’t seem to have had any influence on the size of the federal deficit.

In recent years, moreover, the debt ceiling is becoming increasingly more difficult to manage. So far, the Treasury has always been able to use a series of account gimmicks to keep honouring the country’s debt for a few weeks after effectively reaching the borrowing limit. With the size of the federal deficit now at $1.1 trillion, though, there is less and less wiggle room for the Treasury to keep paying the bills while Congress ponders a raise, CRS noted.

Fast-forward: What happens next?

Notwithstanding a likely (temporary) resolution to the debt ceiling, there are two more fast-approaching fiscal deadlines:

According to the Jan. 1 fiscal cliff deal, $110 billion in automatic spending cuts—half of them from defence—will kick in on March 1, unless Congress acts to amend the law. (This is the so-called “sequester,” a shock therapy that would drastically reduce the deficit but also drag down growth and upset powerful constituencies across the country, as I explained here.)

On March 27, funding for government agencies is set to expire, which will cause a government shutdown unless Congress approves new spending.

The road ahead, in other words, is a minefield of fabricated fiscal crises. And even if Congress and the Administration manage to continue in their dangerous dance without triggering a blow-up, they’re still likely doing damage to the economy.

Policy uncertainty, as the fiscal cliff and the 2011 debt-ceiling showdowns demonstrated, hampers growth by sapping business sentiment and consumer confidence. And the nerve-wracking spectacle of Washington politics could turn off U.S. creditors even if Treasury keeps paying everyone on time. After all, political paralysis is an element of risk, and markets might one day start to price that in.

Besides, as TD economist Beata Caranci noted in the wake of the fiscal cliff law, none of the fiscal battles awaiting us in 2013 will force lawmakers to grapple with the most serious long-term threat to the fiscal sustainability of the U.S. debt: rising healthcare costs.

1. The 11th-hour deal to limit the damage from the U.S. from driving over the “fiscal cliff” on Dec. 31 is being hailed as a success insomuch as it averts an immediate crisis (pushing the world’s largest economy into recession) and represents a rare bipartisan agreement in Washington (although a deal was inevitable given the dire consequences). Under the bill, which is expected to be made retroactive to Jan. 1, income and capital gains taxes raised on the wealthiest Americans for the first time in decades. However, a payroll tax holiday will also be allowed to expire for all American workers. What the deal didn’t address is the other half of the so-called cliff: hundreds of billions worth of planned spending cuts and the debt ceiling.

2. The fiscal cliff was a totally manufactured term referring to a self-manufactured crisis on the part of the U.S. government. It started during another self-manufactured crisis, the debt ceiling crisis of 2011, when as an attempt to kick the can down the road on that fake crisis, the Congress decreed that a “supercommittee” would have to come up with a mix of tax increases and spending cuts. If the supercommitee did nothing by Jan. 1, 2013, a mix of heavy spending cuts and tax increases totaling an estimated $600 billion would happen automatically. Inevitably, the supercommitee turned out not to be so super, and the Congress was faced with trying to pass a law to avoid the problems they could have avoided by simply raising the debt ceiling cleanly in 2011.

3. The fiscal cliff follies are simply a trial run for the next fake crisis, which will occur this year when Congress has to raise the debt ceiling again. Traditionally, the debt ceiling was simply a fait accompli, since it’s just a formality that most countries don’t even have. But during the Obama administration, the Republican House has decided to use the debt ceiling to extract concessions on taxes and spending. Their supporters argue that the U.S. has a spending crisis that needs to be dealt with before the debt ceiling is raised; their detractors accuse them of holding the full faith and credit of the U.S. hostage. But one thing is for certain: this is the new normal, at least while the Republicans control the House – and thanks to gerrymandered districts, they are expected to control the House for the next decade. The “fiscal cliff” was just a preview of things to come.

4. By bringing the Senate’s “fiscal cliff” bill to the House floor, Speaker John Boehner may have broken one of the most notable rules of the Republican Congress: the “Hastert rule,” created under former Speaker Dennis Hastert. It decreed that bills would not be brought to the floor unless they could get the necessary 218 votes from Republicans alone. If the Republicans did not support a major bill enough to pass it, it would not be passed with a mix of Republican and Democratic support. This rule was meant to strengthen partisan control over the House, as well as to deal with the increasing partisan split in the House (both Democrats and Republicans, when they are in the minority, often band together to deny any support to the opposing party’s bills). But when he was unable to cobble together 218 Republican votes for an amended version of the Senate bill, Boehner essentially threw up his hands, brought the Senate bill to the floor, and passed the bill with a majority of Republicans opposing it – and with several people who are after his job, like Majority leader Eric Cantor, voting against it. It’s a major blow to Boehner’s ability to command a majority of his caucus, if nothing else.

5. World markets are reacting positively to the fiscal cliff deal, but the respite will be brief. The U.S. still needs to hammer out a long-term solution to its debt crisis and figure out a way to get the economy rolling again. And despite the most recent deal, there’s little reason to be optimistic that Republicans and Democrats have suddenly discovered the art of compromise. They had well over a year to figure out a way to avoid the self-imposed fiscal cliff, but were unable to do so until the very last minute. And even then, they were forced to put off finding a more comprehensive solution for a few more months. In the meantime, the fate of the U.S. economy—and Canada’s—hangs in the balance.

]]>Just about my favourite thing in the world is when someone comes up with an idea for a policy move that (a) seems completely ludicrous but (b) is completely legal and (c) would probably work. With the U.S. headed for the so-called “fiscal cliff,” there is renewed discussion of a weird jiujitsu move that President Obama could conceivably use to elude the congressional debt ceiling.

The executive branch is, as a general rule, not allowed to incur debt in defiance of Congress, and the U.S. Mint’s printing of money is strongly circumscribed by statute. But last year a blogger named Carlos “Beowulf” Mucha noticed an oddity in the U.S. Code: the Treasury does have an explicit unrestricted right to order the mint to create collectible platinum coins of arbitrary face value. They can’t be gold or copper or aluminum; they have to be platinum. Under this theory, the President could tell the mint to strike a couple of platinum coins with denominations of $1 trillion each. He would then deposit them with the Federal Reserve, in what is actually the ordinary fashion, and the Fed would in turn issue the Treasury a credit of $2 trillion; since the physical specie is there at the bank, no “debt” is technically created at all.

This would be an executive branch intrusion on the Fed’s acknowledged privilege of controlling the money supply. It’s probably the kind of loophole Americans probably do not want to establish a precedent for exploiting. (Insert “Pretty soon you’re talking real money” joke here.) But amidst controversy over the Fed’s management of monetary aggregates, the platinum fantasy is finding enthusiasts in surprising places: not only in the left blogosphere where it originated, but amongst “market monetarist” critics of the Fed (who believe that the central bank should be targeting nominal GDP growth instead of inflation).

Among leading econopundits, Felix Salmon charged that magic platinum coins would represent “the utter failure of the U.S. political system and civil society.” Matt Yglesias questioned whether it was really possible but admitted that the idea “highlights a very accurate point”—that the U.S. controls the unit of account in which its debts are denominated, and so has (finite) room to manoeuvre in ways other countries don’t. Market monetarist Scott Sumner asked whether it was a “brilliant masterstroke” or a “loony idea” and decided “I can confidently answer ‘both’.” A man after my own heart.

]]>http://www.macleans.ca/authors/colby-cosh/should-obama-try-a-little-legal-tender-ness/feed/7The genius of Westminsterhttp://www.macleans.ca/politics/ottawa/the-genius-of-westminster/
http://www.macleans.ca/politics/ottawa/the-genius-of-westminster/#commentsFri, 26 Aug 2011 15:30:32 +0000http://www2.macleans.ca/?p=211807Fareed Zakaria wonders if America would be better off with a parliament.Remember, the political battle surrounding the debt ceiling is actually impossible in a parliamentary system because the executive …

]]>Fareed Zakaria wonders if America would be better off with a parliament.

Remember, the political battle surrounding the debt ceiling is actually impossible in a parliamentary system because the executive controls the legislature. There could not be a public spectacle of the two branches of government squabbling and holding the country hostage.

If we’re in for another five years of this squabbling in the U.S., we are going to make presidential systems look pretty bad indeed.

The most telling moment of the recent standoff over talks to raise the American government’s debt ceiling came on July 22, when President Barack Obama called a press conference to announce that House Speaker John Boehner had backed out of the negotiations. “I’ve been left at the altar twice now,” Obama pouted. In case the image of the President as a jilted lover was not clear to everyone watching, he added that he had spent the previous day waiting for Boehner to return his phone calls.

The whole affair has left a lot of Americans in a state of bipartisan disgust, with citizens from all points on the political compass cursing out their elected representatives. Yet it doesn’t seem to have occurred to many people that there is something structurally flawed with a system that allows the head of just one legislative house to treat the supposed leader of the free world as his last choice for the senior prom. If there’s anything that needs cursing out it isn’t the elected politicians, but the constitution of the United States.

America is a mess. The economy isn’t growing, the job market is a wasteland, its infrastructure is crumbling. On any number of measures, from education to health care to technological innovation, the country is getting beat by up-and-comers in Asia, Scandinavia, and South America. But the real threat to America right now is not economic decline or technological stagnation—those are just the knock-on effects of a much deeper rot.

Political decay is a largely overlooked phenomenon. We tend to think of political development as a one-way ratchet from despotism to democracy, with very little in the way of backsliding. But history is littered with states that flourished and then fell, as their political infrastructure failed to adapt to new and increasingly urgent circumstances.

The American constitutional order rests on the belief that the biggest threat to liberty is the concentration of political power in one person or office. And so the founding fathers gave the new country an absurdly baroque system of checks and balances and of power-sharing between the various political branches. It was designed to dilute political power, but the reality is that the U.S. federal government has a difficult time doing anything much at all.

That’s fine if your big worry is the return of a tyrannical monarch. But despotism comes in many forms, and there is more to political liberty than simply wrapping the government in a straitjacket of constitutional restraints. Sometimes true self-government involves giving the state a free hand to push through an agenda that might be deeply unpopular in the short term, but is vital to the long-term flourishing of the society.

A handful of prominent writers have taken to talking up the virtues of strong government. The New York Times columnist Thomas Friedman has been arguing for a couple of years now that China’s political system is far better equipped to deal with climate change and to force the country into alternative sources of energy. In her recent book How the West Was Lost, the Zambian economist Dambisa Moyo argues that a seven-year election cycle would make it easier for the government to identify problems and put in place more structural solutions without having to face the electorate. Heck, even American politicians recognize that sometimes the government needs to actually do something: one of the great accomplishments of the Bush presidency after 9/11 was to greatly strengthen the hand of the president on issues of national security and foreign policy.

A lot of pundits have been cheering the gunboat politics of the past few weeks as nothing less than democracy in action, with the final debt-ceiling deal read as some kind of healthy pragmatic compromise. While this involves deliberately interpreting the worst bugs in the country’s political software as its best features, the truth is that it is possible to have too much democracy. America’s elected representatives just expended an enormous amount of political capital wrangling over something that should have been passed with a nod months ago, while far more important matters went unaddressed. Worse, even conservatives admit that the Tea Party caucus got next to nothing for their efforts, despite making it clear they were willing to nuke the country’s credit rating over spending cuts.

Edmund Burke once wrote, “A state without the means of some change is without the means of its conservation.” He was talking about the French Revolution, in particular about the way the aristocracy of the ancient regime had so entrenched itself as a parasitic class that it had become completely unreformable. The only way to do a hard reboot of the French state was to cut off a large number of heads.

It’s hard to see a revolution coming to America. Yet it’s also hard to see that its political system has the internal resources to reform itself. The result, then, will be the steady rise of more agile and focused countries, while America settles into a long and drawn-out period of political decay. Right to the end, they’ll probably keep calling it democracy.

]]>http://www.macleans.ca/general/the-trouble-with-too-much-democracy/feed/29Who really won the U.S. debt debate?http://www.macleans.ca/general/who-really-won-the-u-s-debt-debate/
http://www.macleans.ca/general/who-really-won-the-u-s-debt-debate/#commentsTue, 02 Aug 2011 18:30:37 +0000http://www2.macleans.ca/?p=207210The Republicans don't have as much to celebrate as everyone thinks

]]>I followed the debate over the debt ceiling in the U.S. from Europe, where the commentators were perplexed about why the U.S. government would risk a default for the sake of purely partisan politics. With the deal done and a possible catastrophe is averted, the discussion has shifted to who won and who lost.

Conservatives like columnist Charles Krauthammer have supported raising the debt ceiling all along while acknowledging the work done by Republican negotiators. Others, such as Utah Senator Mike Lee, a leading Tea Party activist, and most GOP presidential hopefuls, opposed it. Respected liberal economist Paul Krugman wrote in the New York Times that President Obama had surrendered. So, who actually won? Was there a winner?

Clearly, this was a manufactured crisis, as raising the debt ceiling has never stirred so much down-to-the-wire confrontation in the past. President Reagan raised it 18 times and he is the darling of the Republican right to this day.

The end result of the negotiations is more debt and cuts that are undefined and gradual. Spending cuts will take place in two sequences (now and within 6 months) and are meant to span the next decade. Both defense and entitlement program cuts are on the table, as well as tax reform. A bipartisan congressional committee will handle the second series of cuts. If the committee is unable to put together a package of cuts that would pass Congress, their disagreement would trigger across-the-board spending cuts.

To many observers, the Tea Party faction of the Republican Party has won the day. The liberal media has lent credence to this view by lambasting Obama and accusing him of capitulation. Even conservative columnist Ross Douthat writes of a “diminished” president. The early assessments may still be a bit premature.

What did the Republicans gain, exactly? They got spending cuts equivalent to the rise in the debt limit. They also got Obama to buy into the debt/deficit discussion. But this is not new ground for Obama. He had already acknowledged the unsustainability of prolonged debt and deficits. The December 2010 deal with a freshly emboldened GOP reflected that view. So I guess, the Republicans win the P.R. war. But on the substance—if not on the means—both parties agree.

The Republicans wanted no new taxes. Yet, tax reform is part of the mandate of the bipartisan congressional committee. Both sides—liberal and conservative—acknowledge that tax reform will result in new tax revenues. Obama has also kept his right to veto the Bush tax cuts when they expire in 2012.

The debt ceiling debate was a convenient tool for more militant Republicans to attack the size and role of government. Entitlement reform is often seen as the vehicle for this. Yet, this deal in the first sequence protects the parameters of entitlement programs, and adds the possibility of defense cuts (a Republican concern, and a Democratic intent) to the mix. If the size and role of government is to change, it will not be solely the way the GOP wants them to. Obama has kept all options open down the road as the deal unfolds.

What did Obama want? He needed to raise the debt ceiling to prevent default and a sure recession. He had to have a credible plan to avoid a downgrade of the U.S. triple A rating. He wanted the cuts to be gradual to avoid stalling the recovery any further and wanted to protect key entitlement programs. He did not want to lose his veto on the Bush tax cuts in 2012 and he did not. Finally, he wanted to avoid a repeat of this summer’s debt ceiling battle prior to the 2012 election. While the credit rating remains a concern, Obama got much of what he felt was necessary.

So, who really won? It is too early to render a definitive verdict. The Republicans did not do as well as the Tea Party hoped. But Obama did not do as badly as his liberal critics would indicate. The result in the 2012 presidential elections will give us the real answer.

]]>The U.S. Senate and President Barack Obama are expected to easily pass a debt ceiling compromise Tuesday, closely escaping economic disaster. The deal includes cutting the country’s deficit and lifting its $14.3 trillion debt ceiling enough to last until after the November 2012 elections. The debt battle has raged in Washington for weeks, as Democrats and Republicans argued over spending cuts and revenue generation through tax hikes. The bitter conflict made investors nervous about a weak domestic economy, and elevated fears about debt problems in Europe. Arizona Democratic Representative Gabrielle Giffords made her first trip to the Washington since being shot in the head in January to cast her vote – a “yes” – at Monday’s House vote on the debt bill.

]]>http://www.macleans.ca/general/debt-deal-likely-to-pass/feed/0The rhetorical deficithttp://www.macleans.ca/politics/ottawa/the-rhetorical-deficit/
http://www.macleans.ca/politics/ottawa/the-rhetorical-deficit/#commentsTue, 02 Aug 2011 14:10:04 +0000http://www2.macleans.ca/?p=207203Tabatha Southey considers the rhetoric of public debt.It’s easy to alarm people over a deficit. It’s a high number and people are forever being told that it’s theirs and …

It’s easy to alarm people over a deficit. It’s a high number and people are forever being told that it’s theirs and their children’s debt and specifically how much of it is theirs, per capita. But no one ever tells them how much highway they own, per capita, or what section of the Grand Canyon is theirs. It’s a very one-sided, frequently opportunistic way of expressing the situation.

The consequences of playing a game around the largely artificial debt ceiling are very real. This is politics triumphing over economics, but without the triumph.

]]>http://www.macleans.ca/politics/ottawa/the-rhetorical-deficit/feed/27The centre in crisishttp://www.macleans.ca/politics/ottawa/the-centre-in-crisis/
http://www.macleans.ca/politics/ottawa/the-centre-in-crisis/#commentsFri, 29 Jul 2011 21:13:00 +0000http://www2.macleans.ca/?p=207179Bob Rae draws lessons from the U.S. debt crisis.The deep partisanship that has marked the crisis in the United States Congress has some lessons for Canadians. Polarisation is not …

The deep partisanship that has marked the crisis in the United States Congress has some lessons for Canadians. Polarisation is not the “new normal,” as New Democrats and Conservatives are preaching. It corrodes the body politic and takes us away from the simple truth that most people want a moderate, intelligent politics that’s based on facts, evidence, good values and compromise … we need to understand that most goals in politics, as they are in hockey or soccer, are scored from the centre. That’s where the action is, and that’s where most Canadians are. But not the dead centre where it’s safety first and always ‘on the one hand and the other hand,’ but rather an action-filled, resilient, and lively centre that is not afraid of ideas, debate, and looking at issues afresh. And that’s where the Liberal Party needs to be as well.

]]>http://www.macleans.ca/politics/ottawa/the-centre-in-crisis/feed/29Ideological purity and governancehttp://www.macleans.ca/politics/ottawa/ideological-purity-and-governance/
http://www.macleans.ca/politics/ottawa/ideological-purity-and-governance/#commentsFri, 29 Jul 2011 16:00:09 +0000http://www2.macleans.ca/?p=207103In light of the U.S. debt crisis, Fareed Zakaria compares the American system to parliamentary governance.Some political scientists long hoped that American parties would become more ideologically pure and …

]]>In light of the U.S. debt crisis, Fareed Zakaria compares the American system to parliamentary governance.

Some political scientists long hoped that American parties would become more ideologically pure and coherent, like European parties. They seem to have gotten their wish – and the result is abysmal.

Here’s why: America does not have a parliamentary system like Europe’s, in which one party takes control of all levers of political power – executive and legislative – enacts its agenda and then goes back to the voters. Power in the United States is shared by a set of institutions with overlapping authorities – Congress and the presidency. People have to cooperate for the system to work.

]]>http://www.macleans.ca/politics/ottawa/ideological-purity-and-governance/feed/5Debt and responsibilityhttp://www.macleans.ca/politics/ottawa/debt-and-responsibility/
http://www.macleans.ca/politics/ottawa/debt-and-responsibility/#commentsThu, 28 Jul 2011 16:37:54 +0000http://www2.macleans.ca/?p=206978John Pepall, author of Against Reform, points to the U.S. debt crisis as another reason we should appreciate our parliamentary system.Under parliamentary government, a prime minister must take responsibility …

]]>John Pepall, author of Against Reform, points to the U.S. debt crisis as another reason we should appreciate our parliamentary system.

Under parliamentary government, a prime minister must take responsibility for a budget. If it is passed he will have to answer to the voters for it. If the country prospers the voters will cheer him on to re-election. If not, he will have to shoulder the blame and electoral defeat. If it is not passed there will have to be an election and the voters can decide whether they like the budget or would prefer something else.

One way or another parliamentary government forces politicians to take responsibility and holds them accountable … In the U. S. power is dispersed and responsibility is avoided.

]]>As politicians in Washington continue to debate how to prevent an unprecedented debt default on Aug. 2., House Republicans plan to push through a bill Thursday that aims to raise the U.S. debt ceiling while cutting $900 billion in spending over the next decade. The legislation, however, faces the threat of a presidential veto. U.S. President Barack Obama supports an alternative plan put forward by Senate Majority Leader Harry Reid. That plan offers comparable cuts, but would raise the debt ceiling by a record-breaking $2.7 trillion, thus avoiding a replay of the borrowing-limit debate until after the 2012 elections. Reid’s plan is also unlikely to pass without compromise, since Democrats don’t have enough votes to overcome Republican opposition. Analysts predict that failure to raise the nation’s debt ceiling by next Tuesday could be catastrophic for the still-recovering U.S. economy. It could also further de-stabilize the global economic climate.

]]>http://www.macleans.ca/general/boehner-pushing-through-republican-plan-to-prevent-u-s-default/feed/0Plan for the worsthttp://www.macleans.ca/politics/ottawa/plan-for-the-worst/
http://www.macleans.ca/politics/ottawa/plan-for-the-worst/#commentsTue, 26 Jul 2011 16:59:11 +0000http://www2.macleans.ca/?p=206727Peter Devries says if Jim Flaherty is really worried about European and American debt, he needs to budget for it.Good budget planning would include an adequate amount of “insurance” …

]]>Peter Devries says if Jim Flaherty is really worried about European and American debt, he needs to budget for it.

Good budget planning would include an adequate amount of “insurance” or “prudence” to guard against unforeseen events and inevitable forecasting errors. The purpose of the “insurance” is to protect the fiscal targets as much as possible and to give confidence to financial markets and stakeholders that the targets might actually be achieved. This enhances the credibility of the fiscal plan…

The Minister of Finance has expressed his concern about the debt crisis in Europe and the serious fiscal imbalance in the U.S. Despite the evidence that economic growth is slowing in the U.S., and that interest rates will not only rise in coming years but also be more volatile, he has a built a budget framework that offers very little protection against adverse international developments.

U.S. President Barack Obama called for a compromise over the nation’s debt crisis in a primetime speech Monday night. Congress has been at odds on legislation to avoid a default, which will be triggered if legislation isn’t signed by August 2 to raise the debt ceiling. Obama said a Republican plan would only result in another debt emergency in six months’ time. The president has supported tax increases for the rich and spending cuts to reduce federal deficits. House Speaker John Boehner retaliated immediately following Obama’s speech with his own televised address, calling the “crisis atmosphere” the president’s fault and that the White House’s plan amounts to a giant tax hike.

]]>Global stock markets dropped on Monday as U.S. politicians again failed to reach a deal to extend that country’s debt ceiling. With an August 2 deadline for a deal now days away, investors in Asia, Europe and the United States have begun to react, pulling money out amid fears of an unprecedented U.S. default, despite reassurances from Secretary of State Hillary Clinton that she is confident a deal will be struck. Congressional Republicans have so far refused all offers of compromise on the debt ceiling from U.S. President Barack Obama. Obama has said he is willing to slash spending in return for some marginal increases in revenue, but Republicans have so far declined these overtures.

]]>http://www.macleans.ca/general/stocks-tumble-amid-debt-deal-impasse/feed/0Two crises, but one is far more dangeroushttp://www.macleans.ca/general/two-crises-but-one-is-far-more-dangerous/
http://www.macleans.ca/general/two-crises-but-one-is-far-more-dangerous/#commentsMon, 25 Jul 2011 13:00:23 +0000http://www2.macleans.ca/?p=205609COYNE: In the U.S. and Greece, fears of debt spirals compete with fears of default

On either side of the Atlantic, the scene is the same: dramatic closed-door negotiations; days and nights of brinksmanship and finger-pointing; fears of debt spirals competing with fears of default.

What is different is the reaction to each. The American economy is the largest in the world, its government the biggest spender and heaviest borrower in the world. The consequences if the United States were to default on its debts would be incalculably greater than if Greece were to, harming not only its own borrowing ability but the whole structure of international credit. If the “full faith and credit” of the United States of America is not a safe bet, after all, what is?

And yet, with a possible default just days away, investors seem unperturbed. The interest rate on American 10-year bonds remains among the lowest in the world, and has been falling for months. It is tiny, perennially penniless Greece that has the financial markets in an uproar. This week’s meeting of European leaders is being pitched as a last chance to avert disaster, with agreement on a bailout (a second, actually) far from assured.

Of course, the two situations are not the same in one respect. The American debt crisis is wholly invented, an artifact of political disputes between and within the Democratic and Republican parties. Though present deficits and future debts are widely acknowledged to be too high, no one seriously doubts America’s ability to meet its obligations in the short term, while the long term offers plenty of time to make the needed adjustments.

If there is any prospect of default, it is because of the peculiar American requirement that the Congress must separately vote to permit the government to borrow more, having already voted to run a deficit. Usually routine, this year’s vote was seized upon by Republicans as a means of pressuring Barack Obama to consent to draconian spending cuts, a plan that was going swimmingly until the President, in a cunning move, agreed—to most of their demands, that is, but not all. As the deadline approaches, Republicans find their own intransigence increasingly contrasted with the President’s statesmanlike moderation. Never mind whether either is strictly true: should it come to a default, they will wear the blame for generations.

But then, the European debt crisis is no less artificial, in a way. Greece may have reached the limits of its borrowing capacity, but again, no one doubts that sufficient funds could be scraped together from other sources to bail it out if need be. The question is whether this is wise and, if so, who should do it. And the answer in either case is: ask Germany.

The Germans have every right to be skeptical. Why, their citizens ask, should they be forced to rescue the Greeks from their own fecklessness? What are the consequences, moreover, of setting such a precedent? What incentive do other debtor nations have to come to grips with their own fiscal problems, if by failing to do so they can force the rest of Europe (read: Germany) to come to their aid?

But the consequences of even a partial default are as dire. As satisfying as it may be to insist that private creditors take a “haircut,” that sets its own precedent. It isn’t only Greek bonds from whom creditors might then flee, but those of other, similarly situated countries—why wait, get out while you can—their debts soaring still further out of control as interest rates rose. In the worst case, Greece might become the first in a wave of defections from the euro, ultimately bringing the whole European project crashing down.

And this is the crucial difference between the two debt crises. Whatever its current political impasse, the United States retains the advantage of having both a single currency and a single sovereign debt-issuer. There is a unified fiscal authority, to complement a unified monetary authority. (Most states are legally forbidden to borrow, and even where this constraint is evaded, are in no practical position to abandon the dollar.) Investors can therefore have confidence that, one way or another, the U.S. government will find a way to make good on its debts.

The euro experiment, by contrast, was an attempt to unite several sovereign debt-issuers under a single currency—a unified monetary authority, superimposed on a welter of competing and conflicting fiscal authorities, quite insubordinate to Brussels. As such, the seeds of the euro’s current crisis were sown at its inception. To be sure, the Maastricht Treaty on monetary union laid down stringent conditions for entry: a deficit of no more than three per cent of GDP, a debt-to-GDP ratio of no more than 60 per cent, and so on. But these were soon breached, and having failed that first test of their resolve, Europe’s leaders found they had little credibility on which to draw in future crises. As, for example, now.

It’s all very well to talk, as some have, about allowing member states to borrow on a common European credit line. But it does not address the underlying problem: if Germany was prepared to finance other countries’ debts in this way, it would be just as prepared to make periodic bailouts. It may no longer be possible to put off the choice that Maastricht tried to finesse. Either Europe must proceed to a unified fiscal authority, implying a unified political authority, i.e. full federation, or it must give up on the euro.

]]>The U.S. Senate is expected to vote down a Republican-backed plan to cut government spending, increase the country’s debt ceiling and implement a constitutional amendment for a balanced budget. The legislation has already passed the Republican-controlled House of Representatives, but the Democrats who hold sway in the Senate have called the plan “weak and senseless.” President Barack Obama has also promised to veto the legislation. American lawmakers have been arguing for weeks over how to raise the country’s $14.3 billion borrowing limit. Obama has agreed to cutting trillions of dollars in government spending over the next decade, but also wants to raise revenues to preserve public services. Republicans have rejected this approach, opposing anything they perceive as a tax increase. Despite the setbacks, White House spokesman Jay Carney says the Obama administration is “absolutely confident” the debt ceiling will be raised by August 2, when the government runs out of money to pay its debt obligations.

]]>Moody’s rating agency has indicated it is considering downgrading the U.S. triple-A debt rating due to the “rising possibility” the U.S. could default on its debt. While the agency said the risk of U.S. not raising its debt threshold in time to prevent a missed payment on outstanding bonds and notes is low, it’s not impossible. U.S. Federal Reserve chairman Ben Bernanke said a default would be disastrous. Negotiations at the White House about raising the debt ceiling are set to continue Thursday. The U.S. hit its $14.3 trillion debt limit on May 16, but has adjusted its spending and accounting to continue operation.

]]>http://www.macleans.ca/general/moodys-places-u-s-debt-rating-under-review/feed/1How politics have come to dominate the debt ceiling debatehttp://www.macleans.ca/general/how-politics-have-come-to-dominate-the-debt-ceiling-debate/
http://www.macleans.ca/general/how-politics-have-come-to-dominate-the-debt-ceiling-debate/#commentsMon, 11 Jul 2011 20:43:04 +0000http://www2.macleans.ca/?p=201603Even though we have heard countless references and discussions about the risks associated with rising the US debt ceiling, we should not be surprised that there is still no deal…

]]>Even though we have heard countless references and discussions about the risks associated with rising the US debt ceiling, we should not be surprised that there is still no deal as the supposed deadline of August 2 looms. The debate over a compromise solution has become so politicized both sides are now hardening their positions rather than looking for compromises.

The Republicans have staked their positions: no new taxes and massive spending cuts, in particular to entitlement programs. The presence of a vocal and uncompromising Tea Party contingent makes it difficult for the more moderate Speaker of the House, John Boehner, to deliver votes on a compromise deal with Barack Obama. Consequently, the odds of an historic deal between Obama and the Republicans appear very remote.

Obama, having realized that his re-election depends on capturing a majority of the independent voters and keeping his political base intact, seems willing to go some way on spending cuts, but insists on increasing revenue to some extent. Meanwhile, the Democratic left has grown worried the president’s concessions could upset the Democratic base. At issue for Democrats are the Congressional elections of 2012 and regaining control over Congress.

Recent unemployment figures have complicated matters. Nagging unemployment has proven to be a significant drag on the economy. Like he did with the wars in Iraq and Afghanistan, Obama is now owning the economy. The Republicans have successfully been able to add the debt ceiling debate to the conversation, making the extremes in both parties reluctant to cut a deal.

What, then, will happen with the debt ceiling? Will the U.S. default on its debt, setting the stage for a potential economic catastrophe? Or is the threat of a default just a Democratic ploy to force the Republicans to bend? Considering that the U.S. is still the biggest and strongest economy in the world, and given that the U.S. currency is the reserve currency of the world, a default or the possibility of one should not be taken lightly. It is almost certain a short term compromise deal will occur. One would hope principle will triumph over politics. However, the last few days do not bring encouraging news.

This will be a leadership moment for all concerned. President Obama has modest approval ratings (between 46 per cent and 48 per cent), while support for Congress is hovering around the 20 per cent mark. The president has a bully pulpit and this should be a decided advantage. Moreover, the Republicans have no clear frontrunner to go head-to-head with Obama. How effectively Obama uses those advantages in the days ahead may well determine his fate in 2012.

The weeks of threats of a government shutdown, and the late-night political brinkmanship between House Republicans, Senate Democrats and President Barack Obama, turns out to have been a mere warm-up. America’s grand fiscal drama is just getting started.

The standoff that kept the public on edge about national parks and tax-return processing only resolved spending for the rest of the fiscal year, which ends on Sept. 30. Leaders ultimately agreed on US$38.5 billion in budget cuts across a range of government departments. It’s a massive one-year cut not seen since the Reagan era, but in terms of the projected 2011 deficit of $1.6 trillion (all figures in U.S. dollars), a mere rounding error. Still, Republican House Speaker John Boehner claimed victory for wringing the concessions from the Democratic-led White House and Senate. But the Republican lawmakers—swept into office by Tea Party fury and a promise to cut $100 billion in spending the first year—pronounced themselves disappointed.

Democrats shielded spending for early childhood education, university grants for low-income students, and medical research grants, among others. And Republicans failed in their effort to use the funding deal to cut off government funding for Planned Parenthood, which provides contraception and abortion, and to roll back some environmental regulations. (Social conservatives did, though, extract a price for the final late-night compromise: a ban on government funding for abortions in Washington, which is overseen by the federal government. This led to the remarkable sight of the outraged Democratic mayor of the nation’s capital, Vincent Gray, arrested as he protested the deal in front of the Capitol building.)

With the shouting about the budget compromise still echoing, another faceoff is already under way, this time over raising the legal limit on federal borrowing. The U.S. government is expected to reach the congressionally mandated borrowing cap of $14.3 trillion by mid-May. Unless the cap is raised, Washington will have to stop borrowing, at a time when borrowing accounts for nearly 40 per cent of the federal budget. Republicans say they will approve a cap increase only if it is accompanied by additional spending cuts and reforms. “My members won’t vote to increase the debt limit unless we take serious steps in the right direction,” Boehner told Fox News. Democrats accuse Republicans of holding the entire economy hostage because a failure to raise the cap could lead the U.S. government to default on its debts, an outcome that both the White House and Wall Street have called “catastrophic.”

Meanwhile, another battle is brewing over the 2012 budget. Republicans fault Obama for failing to tackle America’s long-term debt in the budget plan he laid out in February. In response, the House budget committee chairman, Wisconsin Republican Paul Ryan, released his own 2012 budget plan that would make unprecedented spending cuts, including slashing entitlement programs such as Medicaid and Medicare (the government health plans for the poor, elderly and disabled). The proposed changes would cost $6.3 trillion less than Obama’s budget as they take effect over 10 years. Some conservatives hailed the plan as “brave,” but liberals called it a fraud. Critics fault Ryan’s proposal for offering tax cuts to upper-income earners and corporations that would actually make balanced budgets more difficult to achieve, and for leaving a bloated defence budget untouched while slashing social safety-net programs. It would also sharply increase out-of-pocket health care costs for future retirees, and rescind Obama’s health insurance reform law, along with its measures aimed at curbing the growth in medical costs.

In response, Obama was scheduled to lay out his own plan for cutting the debt on Wednesday, one that was expected to include less drastic cuts to Medicare and Medicaid, along with cuts to military spending and tax increases for the highest earners. Meanwhile, a bipartisan “Group of Six” senators are working on their own proposal, which would combine cuts to entitlement programs with broad tax reform that they hope could pass the closely divided Senate. They based their work on the December report of a bipartisan fiscal commission put together by Obama.

What this season of proposals and posturing will ultimately add up to remains to be seen. Washington will have to tackle its deficits and ballooning debt—eventually, said William Galston, a fellow at the Brookings Institution. “I am confident that it will happen no later than the next presidential term—no matter who is the president,” said Galston, a former adviser to president Bill Clinton. “Because I don’t think the global markets will allow us to continue on this path much longer.”